Fed’s Favorite Inflation Gauge Rises to 2.7% in August/ Newslooks/ WASHINGTON/ J. Mansour/ Morning Edition/ The Federal Reserve’s preferred inflation measure, the personal consumption expenditures (PCE) index, rose 2.7% in August, up slightly from July. Consumer spending, adjusted for inflation, climbed a solid 0.4%, driven mostly by goods purchases. The data may complicate the Fed’s cautious path on interest rate cuts amid political pressure from President Trump.
Quick Takeaways
- Headline Inflation: PCE index rose 2.7% YoY in August (vs. 2.6% in July).
- Core Inflation: Up 2.9% YoY, unchanged from July.
- Monthly Prices: Overall prices +0.3% MoM; core +0.2%.
- Consumer Spending: Inflation-adjusted spending +0.4% (goods +0.7%, services +0.2%).
- Income Growth: Personal income +0.4%; wages +0.3%.
- Fed Policy Context: Inflation still above 2% target despite cooling since 2022–23 hikes.
- Recent Fed Move: First rate cut of 2025 delivered last week.
- Political Pressure: Trump continues to push for deeper cuts, attacking Fed Chair Powell.
- Uncertainty Ahead: Tariffs and global trade tensions complicate the outlook.
- Why PCE Matters: Captures consumer substitutions better than CPI.
Full Story: Inflation Gauge Rises Slightly, Fed Faces Tough Balancing Act
The Federal Reserve’s preferred inflation barometer ticked higher in August, signaling persistent price pressures even as consumer spending shows resilience.
The personal consumption expenditures (PCE) price index, released Friday by the Commerce Department, climbed 2.7% year-over-year, compared to 2.6% in July—its fastest pace since February. On a month-to-month basis, prices rose 0.3%, an acceleration from the prior month’s 0.2% increase.
Core Inflation Steady
Excluding volatile food and energy costs, core PCE inflation remained at 2.9% year-over-year, exactly matching July’s pace and in line with economist forecasts. On a monthly basis, core prices rose 0.2%, unchanged from the month before.
Consumers Keep Spending
Despite stubborn inflation, consumer demand held firm:
- Inflation-adjusted spending: +0.4% in August, same as July.
- Goods spending: +0.7%, led by durable purchases.
- Services spending: +0.2%, reflecting modest growth in categories like dining and travel.
Oxford Economics’ Michael Pearce noted that wealthy households are driving much of the spending:
“The resilience of the U.S. consumer was on show once again … but the gains are concentrated at the top of the income distribution.”
Incomes Continue to Grow
Personal incomes rose 0.4% in August, matching July. Key details:
- Self-employed & business owners: +0.9%, repeating July’s strong gains.
- Wages & salaries: +0.3%, down from July’s 0.5%.
Fed’s Dilemma: Inflation vs. Jobs
The Fed has made significant progress since raising rates 11 times in 2022 and 2023, which slowed inflation from multi-decade highs. But price growth remains above its 2% target.
Last week, the Fed delivered its first rate cut of 2025, citing a weakening labor market. Yet officials remain cautious, monitoring the impact of Trump’s tariffs on imports and their potential inflationary effects.
President Trump has repeatedly pressured the central bank for more aggressive cuts, calling Chair Jerome Powell a “moron” and “Too Late.” His administration has also sought to reshape the Fed, including efforts to remove board member Lisa Cook, who is contesting her dismissal in court.
Why PCE Matters
While the Consumer Price Index (CPI) often grabs headlines, the Fed prefers the PCE gauge. It reflects changes in consumer behavior more accurately—capturing, for example, when shoppers switch from expensive national brands to cheaper alternatives during inflationary periods.
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